Short Run

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What is the 'Short Run'

The short run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short run does not refer to a specific duration of time but rather is unique to the firm, industry or economic variable being studied. A key principle guiding the concept of short run and long run is that in the short run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium.

BREAKING DOWN 'Short Run'

This constraint differs from the long run, which is considered to contain only fixed costs. In the short run, leases, contracts and wage agreements limit a firm's ability to adjust production or wages in order to maintain a rate of profit. If a hospital experiences lower than expected demand in a given year, but its entire employment force of doctors, nurses and technicians is under contract for the duration of the year, then the hospital has no choice but to swallow a cut in its profit. In the long run, firms in capital-intensive industries, such as oil and mining, have time to expand or shrink operations in factories or investments in correspondence with changing demand, but in the short run, they are unable to capitalize on changes in demand with the same degree of flexibility.

Real-World Examples of Short Run Costs

Mining and energy giants have been hit especially hard by the fall in iron ore, coal, copper and other commodity prices, underscoring their high fixed costs in the short run; Glencore lost $5 billion in 2015, while Vale lost $12 billion, and Rio Tinto lost $866 million. Despite lower prices, these firms continue to ramp up production due to new investments, particularly in areas such as Brazil and Australia, made when commodity prices were significantly higher around 2011. For instance, Glencore purchased Xstrata in 2013 for $30 billion in a deal in which it acquired most of its mining assets, which have depreciated greatly in value.

In the analysis of short-run versus long-run costs, it is important to understand the behavior of the firms. In certain situations, it may be preferable to keep operating an unprofitable firm over the short run if this helps to partially offset costs that are fixed. In the long run, however, an unprofitable firm will be able to terminate its leases and wage agreements and shut down operations